Improper Intra-Group Transactions

Conduct of lending funds to an affiliate at an interest rate lower than the market rate, or lending funds without interest or for a long term in the form of loans or advance payments, is prohibited as an improper intra-group transaction.

Underwriting corporate bonds, providing payment guarantees, providing repayment collateral, and contributing cash may also constitute improper support, and the conditions and interest rate of a financial transaction should be consistent with market standards.

The Fair Trade Commission has clearly stated that, in an intra-group transaction, if the interest rate, collateral conditions, and the setting of the term are unreasonable compared with a third-party transaction, it may be regarded as a support act.

Therefore, in practice, securing transaction contracts, board resolutions, and comparative estimates is required.

Conduct of providing assets, goods, or services to an affiliate at a price significantly lower or higher than the ordinary transaction price, thereby supporting it with benefits, also constitutes a type of improper intra-group transaction.

This includes cases of transferring real estate, securities, intangible property rights, and similar assets on more favorable terms than their appropriate value, or selling them at a low price or purchasing them at a high price.

When excessive economic benefits are provided to an affiliate through an intra-group transaction even though objective transaction conditions have not been formed, unlike a normal transaction, it is judged to be an improper support act.

In practice, the risk can be prevented only by undergoing a review of appropriateness in advance through comparison with third-party transaction prices and an independent valuation.

Supporting personnel between affiliates free of charge or on excessive terms, or providing personnel at labor costs significantly lower than the market level when dispatching personnel, is also prohibited.

In particular, the free support of key management, sales, and finance personnel has a high likelihood of being misused as a means of maintaining the group's control and supporting the profits of affiliates.

In such cases, it is necessary to review whether personnel support is carried out without a transactional relationship and whether the dispatch conditions are consistent with market wages.

A procedure to confirm transactional independence and appropriateness through personnel support contracts and salary records is needed.

Bypassing the normal transaction route and inserting an affiliate in the middle to guarantee transaction profits is also a representative type of improper intra-group transaction.

When a specially related person that has no substantial role in the transaction is made to participate in the transaction while an excessive margin is guaranteed, this corresponds to conduct of paying excessive consideration relative to the role in the transaction.

This is conduct of artificially increasing the sales and profits of an affiliate by dealing through the affiliate, even though dealing directly with a third party would be more advantageous.

To prevent this, a review of objective necessity and the securing of analytical materials on alternative transactions are needed when designing the transaction structure.

To prevent unfair intra-group transactions, enterprise groups subject to disclosure are advised to operate an internal transaction review committee, a compliance support officer system, and an affiliate independence assessment framework.

Before a transaction, the company should review the possibility of dealing with a third party, the appropriateness of the price and conditions, the legitimacy of the transaction purpose, prior board approval, and whether the transaction must be disclosed.

When the board resolves on a transaction, approval by at least two-thirds of the directors is required, and the opinion of the outside directors should be attached, which can reduce legal risk.

In particular, preparing and retaining in advance a review document covering the transaction stages, the pricing method, and the appropriateness of each party's role is an effective response measure.

✔️Did the company provide funds, such as provisional payments or loans, to an affiliate at consideration substantially lower or higher than the market interest rate or the conditions of a third-party transaction?

✔️Did the company delay or default on the payment deadline for accounts receivable, service fees, or similar amounts without collecting any late-payment interest?

✔️Did the company lend purchase funds to, or arrange financing for, officers and employees purchasing products made by an affiliate, and have all or part of the interest borne by affiliate funds?

✔️Did the company overpay advertising fees by paying advertising media a fee higher than the normal unit price?

✔️When entrusting housing management work to an affiliate, did the company defer the date of the settlement payment beyond the date for paying the entrustment fee, thereby attributing to the affiliate the interest income from managing the settlement funds?

✔️Did the company provide assets, goods, or services to an affiliate free of charge or at a price lower than the normal price, or receive them from an affiliate at a price higher than the normal price?

✔️Did the company support an affiliate by delaying the collection of accounts receivable or by writing them off as uncollectible?

✔️Is there any case in which the company purchased goods produced or sold by an affiliate on terms more favorable than ordinary transaction conditions, thereby artificially increasing the affiliate's sales and profits?

✔️Did the company provide personnel to an affiliate at an amount lower or higher than the ordinary consideration, or free of charge?

✔️Did the company dispatch personnel to provide business support and have the affiliate bear the wages and labor costs?

✔️Did the company enter into a personnel dispatch contract and provide personnel, but omit recovery of all or part of the retirement allowance reserve or welfare expenses?

✔️In a transaction, has the company unfairly concentrated transaction volume on an affiliate for the purpose of supporting it?

✔️Did the company provide an affiliate or subsidiary with substantially low or high consideration, or an excessive volume of transactions?

✔️Is there any case in which the company traded goods or services by inserting in the middle an affiliate or specially related person that played no substantial role?

✔️Did the company design a transaction structure that unnecessarily routed through an affiliate when dealing directly with a third party would have been substantially more favorable?

✔️Has the company engaged in a transaction with substantially favorable conditions, such as provision at a bargain price or purchase at a high price?

✔️Did the company provide a business opportunity that would have been profitable if performed directly by the company itself to a specially related person or an affiliate?

✔️Did the company concentrate a substantial volume on a particular affiliate without reasonable review?

✔️Is there a record of review of legitimate grounds, such as efficiency, security, or urgency, regarding the transaction?

✔️When conducting sales transactions with an affiliate, did the company objectively compare and evaluate the financial condition, technical capability, quality, transaction scale, and transaction timing of the affiliate's counterparty?

✔️When changing the transaction structure, did the company undergo a prior legality review through the legal team, the compliance support officer, or outside legal counsel?